NRF says retailers victorious on gift card tax issue

Craig Shearman, Vice President for Government Affairs at the National Retail Federation, reported in the NRF publication Washington Retail Insight that retailers won a victory recently when the Internal Revenue Service said merchants can defer tax payments on gift card income for up to a year, even if the cards are sold through subsidiaries or franchises.

According to Shearman, retailers and the IRS have been at odds in recent years over when gift card income must be reported to the IRS. The disputes revolve around subsidiaries merchants set up to handle gift card programs, Shearman said.

The IRS has argued that if a card is sold by a subsidiary but redeemed at another division of the retailer, such as the parent company, then that income is taxable at the time the card is sold. The NRF countered by saying income from gift cards still goes to the same company, whether the cards are sold directly by the parent company or a subsidiary, so that income should be treated the same as any other income.

When the IRS ruled that such income can be deferred, the NRF called it a victory because "deferral can be a significant factor in a retailer's tax liability when a card is sold one year and not redeemed until the next year, as often happens around the December holiday season."

In a separate decision, the IRS said taxable income associated with prepaid cards issued as refunds on returned merchandise can also be deferred.

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